Buy Now, Pay Later (BNPL) like Affirm, Afterpay and Klarna offer shoppers the option to split large purchases into interest-free installments at checkout. Until recently, the BNPL was not included in credit reports, which meant that these borrowers did not benefit from making payments on time.
That changed earlier this year when Equifax became the first credit bureau to include BNPL payment information when calculating credit scores. And on February 24, TransUnion followed suit by introducing a new feature that allows users to add their BNPL plans to their credit history.
“Including point-of-sale loans, including BNPL, in credit reports and other risk management tools can help tens of millions of consumers access more credit opportunities and potentially get better loan terms,” said Liz Pagel, senior vice president of TransUnion.
TransUnion users must register to add BNPL trade lines to their credit profile. By default, the delivery of credit reports to existing scoring models will not be affected.
Keep reading to learn more about BNPL’s impact on credit reports, as well as what you can do to improve your credit score. You can sign up for Experian’s free credit monitoring services on Credible.
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BNPL in credit reporting will “maximize financial inclusion”
Up to 100 million Americans have used a BNPL service at least once in the past year, TransUnion reported. And Millennials and Gen Z consumers are using this financing option at high rates – a third of BNPL applicants are between the ages of 18 and 30.
Including BNPL’s payment history in credit reports could benefit these younger consumers with thin credit records by giving them a way to start building and improving their credit.
“Maximizing the impact of financial inclusion requires broad use of this valuable data in more credit decisions.”
However, consumers may not begin to reap the benefits until BNPL loan data is widely used by financial institutions and lenders. Credit reporting companies need time to create BNPL payment data in their future underwriting, TransUnion reported.
For example, VantageScore is “working quickly” to incorporate BNPL installment loans into its rating models, according to the company’s president and CEO, Silvio Tavares. Additionally, FICO is still determining “the best approach for including BNPL data,” said Sally Taylor, vice president of FICO Score.
In the long term, TransUnion said it expects the addition of BNPL’s consumer data to help some borrowers improve their credit scores. In the short term, however, consumers may need to look for other ways to improve their creditworthiness. You can start building your credit score by signing up for credit monitoring on Credible.
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Short term ways to improve your credit score
There are several long-term ways to boost your credit score, such as improving your on-time payment history and building your average credit age over time. If you’re looking for short-term fixes to improve your credit score, consider these strategies:
- Check your credit report for errors. You can request a free credit report from all three major credit bureaus at www.AnnualCreditReport.com. If your credit report contains errors, such as incorrectly missed payments or missing accounts, file a dispute with the credit bureau.
- Open a secure card. Also known as credit cards, secured credit cards allow you to borrow money from a line of credit secured by a cash deposit. This can help you establish a timely payment history and diversify your credit mix. You can compare secured credit cards on Credible.
- Pay off your credit card debt. Your credit utilization ratio is the amount of debt you owe compared to your available credit. Paying off your credit card balances will reduce your credit utilization, which will have a quick positive impact on your credit score.
You might consider using a fixed rate personal loan to pay your credit card balances to zero. Personal loan rates are currently at historic lows, according to the Federal Reserve, but the interest rate you qualify for depends on your creditworthiness.
You can compare personal loan rates on Credible for free without impacting your credit score and decide if this credit building strategy is right for you.
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